Tuesday, December 27, 2011

John Carney — "Modern Monetary Theory and Austrian Economics"


Thoughtful post advancing the debate between MMT and Austrian economics. It's definitely creating a buzz in the blogosphere.

Read it CNBC Net Net
Modern Monetary Theory and Austrian Economics
by John Carney- CNBC senior editor

I will likely take up some of the points raised in future points here, since they are also related to anarchism-libertarianism. Obviously, the major sticking point between MMT and anarchism-libertarianism is that MMT is policy oriented and its prescriptions rely chiefly on fiscal policy, although that is much more of a problem in the eyes of Libertarians aka Anarcho-capitalists than left libertarians aka Anarcho-socialists.

UPDATE: Austrian economist Edward Harrison who has adopted MMT has posted on MMT several time in the past on MMT.

MMT For Austrians

Economics 101 on government budget deficits

MMT: Fear of Hyperinflation

Hyperinflation in the USA

Modern Monetary Theory: Market Discipline for Fiscal Imprudence; Term Structure of Interest Rates

MMT'ers also responded to the criticism of MMT by Prof. Robert Murphy from the vantage of Austrian economics. The links can be found at the MMT Wiki here. See the replies in the comments.

19 comments:

Dan Kervick said...

I made some comments on this Carney piece over at Warren Mosler's blog. Basically, I think some of Carney's attempts to find common ground between Austrians and MMT are unconvincing, and rely in spots on some misunderstandings of MMT. But I thought his criticism of Wenzel on functional finance and fiscal policy was good.

However, he says Wenzel’s challenge to functional finance is "not particularly Austrian." But I have heard essentially the same charge Wenzel makes, which essentially comes from Hayek, made by innumerable Austrians.

Tom Hickey said...

I think that Carney overlooks that there various flavors of Austrian economics. There is quite a range of thinking and attitude in the Austrian school. Some are professionals and others not so much. Some are Very Serious People and some are cranks. There even some kooks, too.

I think that MMT'ers can have a fruitful discussion with Austrians like Edward Harrison. Many of the others, not, as we have seen on this blog in the comments.

There has to be common ground for a discussion to take place. When one side lays down rules that the other side is not willing to accept, then the debate comes to a halt.

Matt Franko said...

Couple things:

JC: "The MMTers think the financial system tends toward crisis."

I dont know if Warren Mosler would agree with this per se. I have read Warren put it: "the banking system is necessarily pro cyclical" or thereabouts... with the primary cycle set by fiscal policy.

JC:" because—as the MMTers would agree—government spending in our age typically involves monetary expansion."

I dont think this directly follows from MMT. ie a "monetary expansion" is a Fed operation, whereas "spending" is done by the Treasury, "spending" may or may not result in a Monetarist termed "monetary expansion", whether or not probably depends on Fed policy.

Resp,

Tom Hickey said...

@ Matt,

I don't think that JC has stated that quite correctly either, since I have never heard an MMT economist put it that way.

MMT'ers are Minskians by and large, which means that they think that the financial system is instable. Minksy: "Stablity leads to instability."

They are agree with Keynes and Post Keynesians about uncertainty, as well as in rejecting the natural tendency of markets to equilibrium at full employment.

Matt Franko said...

Another thing I pick up is the whole monetarist concept of "inflation" may be at odds with how the MMT thought leaders look at "inflation".

This is a previous post I did on what I view as the MMT view on "inflation". The MMT thought leaders imo once again have to come back to the government currency monopolist as the ultimate "price setter" in the economy.

http://mikenormaneconomics.blogspot.com/search?q=infaltion

Let's just stop talking about "money supply" in the context of an evaluation of "inflation".

Resp,

Matt Franko said...

Previous comment in light of JC here: "This is not to say that MMTers believe that governments can spend without limit. Governments can overspend in the MMT paradigm and this overspending leads to inflation. Government financial assets may be unlimited but real assets available for purchase—that is, goods and services the economy is capable of producing—are limited. The government can overspend by (a) taking too many goods and services out of the private sector, depriving the private sector of what it needs to satisfy the people, grow the economy and increase productivity or (b) increasing the supply of money in the economy so large that it drives up the prices of goods and services."

I dont think MMT leaders agree with the causations that JC identifies here... "crowding out" and "money supply"

Resp,

Dan Kervick said...

There is probably no definite answer to the question of exactly what is and is not inside the MMT paradigm. But one strain of MMT thought comes from the Minskyan direction, as developed by people like Randall Wray and his Levy Institute colleagues. Here is part of Wray's account of Minsly's approach in Stabilizing an Unstable Economy:

"Unlike other critical analyses of capitalist processes, which emphasize the bust, Minsky was more concerned with the euphoric period. And unlike other analyses that blame “shocks”, irrational exuberance, or stupid policy, Minsky argued that the processes that generate financial fragility are “natural”, or, endogenous to the system."

"According to Minsky, the capitalist economy is at best “conditionally coherent” (p. 106). He rejected the equilibrium methodology of mainstream economics as irrelevant to analysis of a real world capitalist economy with complex and expensive capital assets. Instead of equilibrium, he proposed “periods of tranquility” (p. 176) characterized by a robust financial system and few innovations. During those periods, the financial aspects of investment are less important. However, “stability is destabilizing”, as relative tranquility encourages more risk-taking and innovative behavior that increases income even as it disrupts the conditions that generate “coherency” and “tranquility”. That is, the market forces that operate when a system is stable will push it toward stability, so that even if anything like an equilibrium could be achieved, it would set off behavioral responses that would quickly move the economy away from equilibrium."

and later ...

"Investment can proceed only if the demand price exceeds supply price of capital assets. Because these prices include margins of safety, they are affected by expectations concerning unknowable outcomes. In a recovery from a severe downturn, margins are large as expectations are muted; over time, if an expansion exceeds pessimistic projections these margins prove to be larger than necessary. Thus, margins will be reduced to the degree that projects are generally successful. Here we can insert Minsky’s famous distinction among financing profiles: hedge (prospective income flows cover interest and principle); speculative (near-term income flows will cover only interest); and Ponzi (near-term receipts are insufficient to cover interest payments so that debt increases). Over the course of an expansion, these financial stances evolve from largely hedge to include ever rising proportions of speculative and even Ponzi positions."

So on Minsky's view, the natural tendency toward fragility and instability, hedge to speculative to Ponzi positions, is built right into a modern capitalist economy with abundant and complex financial instruments. It is not some pathology foisted on an otherwise healthy system by a blundering government. The main are in which governments blunder is in - like Alan Greenspan - adopting a laissez faire faith, and failing to regulate a system that is inherently unstable without regulation.

The way I read him, then, Minsky is saying that a capitalism financial system without exogenous government regulation is like a nuclear reactor without a cooling system and containment. Without the regulatory apparatus, it goes critical and melts down in short order.

Dan Kervick said...

Oh, I see Tom already made the Minskyan point. Sorry for the redundancy.

Tom Hickey said...

@ Matt,

MMt economists would say that government can create inflation by bidding up prices by focusing on quantity instead of price instead of realizing that they are are the monopolist and can set price through their bidding and let quantity float. Government can also fuel incipient inflation through price indexing.

MMT economists would not talk of supply of money. They would say that injection of non-government NFA can stimulate effective demand beyond the capacity of the economy to expand quickly enough to meet it, resulting in a continuous rise of price level. Of course, the sectoral balance approach and functional finance shows how to avoid that scenario.

There also doesn't seem to be much understanding of either the buffer stock of employed instead of a buffer stock of unemployed, or the JG package that establishes a price anchor by setting the floor wage for unskilled labor.

The MMT approach to inflation is extremely nuanced and to approach it in Austrian terms is to misunderstand it.

Matt Franko said...

I dont think that Warren Mosler fully agrees with that, at the risk of putting words in his mouth. I could be wrong but I have been reading him for years now...

The "stabilty" leads to an increase in taxes and a corresponding reduction of the deficit. As NFAs are removed via the smaller deficits, then people are increasingly forced to borrow more to maintain consumption (which can be exacerbated due to how policy dictates the distributional aspects of the remaining NFAs), which is Minsky's "speculation" and then "ponzi".

If govt would proactively keep the deficit higher with an eye on distributional aspects of the policy, then people could spend more out of current income vice increased borrowings which will yes eventually lead to a "Minsky Moment" if the lower brackets continue to be overtaxed and the govt lets the external deficit run wild.

It is not an "invisible hand of instability"

When he writes "the natural tendency toward fragility and instability" this language sets off my "magical thinking radar", if you will.

I think Warren is a big part of all of this and this is how I read him. The MMTers in the academe seem to take a slightly different approach imo. This may be a small point.

Resp,

Matt Franko said...

Tom,

As far as "inflation" and the MMT nuances, my recommendation for others would be to go to the 13:00 mark at the video imbedded in my older post

http://mikenormaneconomics.blogspot.com/search?q=infaltion

and just watch Warren and Bill and Randy talk about this "inflation" topic over and over and over until one "gets it".

It took me many, many views until it finally "clicked" (monetarism is a hard habit to break!;)

Resp,

Matt Franko said...

Tom,

It seems to me that in general, libertarians of the right just have an extremely hard time believing the reality that the govt is the primary driver of the economy.

They just can't believe it.

I have perhaps had an easier time of it as an authoritarian of the center, and it seems libertarians of the left have an easier time also... so that one quadrant (right-Lib) is the problem child...

Resp,

Tom Hickey said...

@ Matt,

ideological block

It's an absurdity.

They are in denial, acting as through the economy were structured in terms of their ideal.

Matt Franko said...

Dan,

Hope you see this...

From Warren Mosler today over at TCOTU:

"thanks, didn’t know that about Minsky. need to read him one day."

Warren is the consummate gentleman so he doesnt push it per se, but I have read these types of statements by him wrt Minsky over the years and read this one here as he doesnt agree with the Minsky part of the story completely... again, the academe is big into the Minsky story, Levy, etc..

Then he goes on:

"First, Minsky isn’t mmt per se.

Second, once it’s recognized that the currency is a (simple) public monopoly astute Austrians, pk’s, and others incorporate that fact into their models."

And this I interpret as WM looks at the govt as the driver of the primary cycle thru fiscal policy, everything is downhill from there...

may not matter that much but it is a nuance around the MMT....

Resp,

libertarian89 said...

In case any of you are interested, or haven't seen these already, Austrian blogger Bob Wenzel discusses the Carney MMT piece in several recent posts:


http://www.economicpolicyjournal.com/2011/12/john-carney-sips-bit-of-mmt-kool-aid.html#comment-form


http://www.economicpolicyjournal.com/2011/12/rejoinder-to-john-carney-on-mmt-and.html



http://www.economicpolicyjournal.com/2011/12/mmter-on-carneys-view-of-austrian-mmt.html



Interesting discussions worth taking a look.

Matt Franko said...

Lib,

From our MaMmoTh over there: "LVG, you are right. Coconut-head Roddis has no clue about MMT,...."

LOL! "Coconut head" AHHHHHH! LOL!!!

Thanks I needed that!

libertarian89 said...

Matt,


Not sure what to make of that comment other than the fact you may be mocking Bob Murphy's piece on MMT. Yes, Roddis is a character, but that shouldn't stop you from at least reading into how Austrians respond to MMT.

Matt Franko said...

Lib,

Wake me up when we go back on the gold standard.

MMT and Austrian Economics have nothing in common imo...

Resp,

libertarian89 said...

Matt,

Oh trust me, you dont have to remind me. I am fully aware.


Dont worry, this whole little experiment in fiat money won't last in perpetuity. They never do.